10.4%-Yield BrightSpire Capital Stock Up 20% Since November
January 4, 2024
Outlook for BRSP Stock Is Bullish
In 2022, in an effort to curb stubbornly high inflation, the Federal Reserve initiated an unprecedented interest rate hike cycle. Since then, the Fed has raised its key lending rate 11 times, from near-zero to the range of 5.25%–5.5%.
While higher borrowing costs can make it more difficult for households to pay down their debt, high interest rates are what make real estate investment trusts (REITs) like BrightSpire Capital Inc (NYSE:BRSP) such a great investment opportunity.
While the Fed has basically stopped raising its rates for this cycle—and it plans to introduce rate cuts in 2024—borrowing costs are expected to remain well above pre-pandemic levels for years. Those conditions should provide plenty of momentum to REITs like BrightSpire Capital over the coming years.
When most people think about REITs, equity REITs are probably what come to mind. There’s a wide range of equity REITs, involving anything from industrial facilities, to hotels, to casinos, to offices, to health-care centers, to retail properties, to data centers, to residential properties.
But there’s also another type of REIT: mortgage REITs (mREITs). These firms invest in mortgages instead of real estate. They provide financing for income-generating real estate by purchasing or originating mortgages and mortgage-backed securities. Then, they earn income from the interest on these investments.
Investors love REITs because the companies legally have to return at least 90% of their taxable income to shareholders in the form of dividends. Better still, REITs tend to perform well in high-interest-rate, high-inflation environments—like the one we’re in now.
An outstanding mREIT that has turned a corner since early November 2023 is BrightSpire Capital Inc. One of the largest publicly traded commercial real estate credit REITs, it has $4.5 billion in assets under management. (Source: “About Us,” BrightSpire Capital Inc, last accessed December 28, 2023.)
The New York City-based company originates, acquires, finances, and manages a diverse commercial real estate portfolio, including senior mortgage loans, mezzanine loans, preferred equity, net leased properties, and other properties and debt securities. (Source: “Portfolio,” BrightSpire Capital Inc, last accessed December 28, 2023.)
One hundred percent of its senior mortgage loans have floating interest rates. By property type, multifamily homes make up 41% of the mREIT’s portfolio, followed by offices (39%), industrial facilities (eight percent), hotels (seven percent), mixed-use properties (four percent), and retail properties (one percent).
Strong Third-Quarter Financial Results
Back in November 2022, BrightSpire Capital’s CEO, Michael J. Mazzei, noted that, while its quarterly results were solid, the company was preparing for the impact of rising interest rates by “significantly throttling back on loan originations while maintaining high cash balances.” (Source: “BrightSpire Capital, Inc. Announces Third Quarter 2022 Financial Results,” BrightSpire Capital Inc, November 2, 2022.)
Fast-forward a year, and BrightSpire Capital reported its third-quarter 2023 financial results on October 30. That was just two days before the Federal Reserve announced that it was, once again, pausing its interest rate hikes and hinted that it was done raising its rates for the current cycle.
For the third quarter ended September 30, BrightSpire Capital reported net income of $12.4 million, or $0.09 per share. This compares to a third-quarter 2022 net loss of $20.5 million, or $0.16 per share. (Source: “Supplemental Financial Report: Third Quarter 2023,” BrightSpire Capital Inc, October 30, 2023.)
The company’s distributable earnings in the third quarter came in at $31.0 million, or $0.24 per share, versus a distributable loss of $24.7 million, or $0.19 per share, in the same prior-year period. Its adjusted distributable earnings in the quarter were $35.8 million, or $0.28 per share, compared to $32.3 million, or $0.25 per share, in the same quarter of 2022.
Commenting on the third-quarter 2023 results, Mazzei said, “While we reported another quarter of strong dividend coverage and a slight increase to book value, we remain focused on asset and liability management and maintaining high cash balances until market conditions improve.” (Source: “BrightSpire Capital, Inc. Announces Third Quarter 2023 Financial Results,” BrightSpire Capital Inc, October 30, 2023.)
Since then, market conditions have improved further. When the Fed met in December, it held its interest rate, saying it was done raising rates for this cycle and that cuts were coming in 2024. It was just the kind of holiday message that investors and mREITs wanted to hear.
Board Declared Quarterly Dividends of $0.20 Per Share
Healthy dividend coverage allows BrightSpire Capital stock to continue rewarding shareholders with reliable, high-yield payouts.
BRSP stock paid monthly dividends before the 2020 COVID-19 crisis. The company suspended its payouts in the second half of 2020, and in March 2021, BrightSpire Capital Inc switched its payouts from monthly to quarterly.
Moreover, the mREIT raised its dividend for five straight quarters, from $0.10 to $0.20 per share. The company has held its distribution at $0.20 per share since the second quarter of 2022.
On December 14, 2023, the company’s board again declared a quarterly dividend of $0.20 per share, for a yield of 10.4% (as of this writing). (Source: “BrightSpire Capital Announces $0.20 Per Share Dividend for Fourth Quarter 2023,” BrightSpire Capital Inc, December 14, 2023.
BrightSpire Capital Stock Ripped Higher in 2023
As you can see in the chart below, BRSP stock has been trending considerably higher since the start of November, rising by more than 36% since then (as of this writing).
The prospect of lower interest rates, coupled with the fears of a recession being in the rearview mirror, have been juicing the price of BrightSpire Capital stock. As of this writing, BRSP stock is up by:
- 22% over the last six months
- 36% year-to-date
- 32% year-over-year
According to Wall Street analysts, BrightSpire Capital stock still has room to run. They’ve provided a median 12-month share-price forecast of $8.50, which points to potential gains of 8.8%.
That estimate might be a little conservative. While the market initially thought the Fed would introduce three 25-basis-point interest rate cuts in 2024, the current consensus is that the Fed will announce at least six 23-basis-point cuts in 2024. This could further juice BRSP stock over the coming quarters.
Chart courtesy of StockCharts.com
The Lowdown on BrightSpire Capital Inc
BrightSpire Capital is a fantastic mREIT with a diverse portfolio of commercial real estate with floating-rate loans.
BrightSpire Capital Inc continues to report solid financial results and provide investors with reliable, high-yield dividends. Thanks to those results and the improving macroeconomic conditions, the outlook for BrightSpire Capital stock is robust.
